Answer to Question #278051 in Microeconomics for Doscal Holm

Question

Use the demand function below to answer the questions that follow

𝑸𝒅𝒙 = 𝟑 − 𝟏 𝑷𝒙 − 𝟓𝑷𝒚 + 𝟐𝑷𝒁 − 𝟐 𝑴 𝟒𝟑 𝟏𝟎

Where 𝑷𝒚 and 𝑷𝒛 are prices of related goods and M is income. Using the demand function;

I. Identify which type of goods is 𝑷𝒛 and explain it

II. Identify which type of goods is M and explain it

III. Identify which type of goods is 𝑷𝒚 and explain it

IV. Interpret 𝑷𝒙

Answer 1

I. Identify which type of goods is Z and explain it

Good Z is a substitute for good X because the coefficient of Pz is positive.

II. Identify which type of goods is M and explain it

Good X is an inferior good because the coefficient of M is negative.

III. Identify which type of goods is 𝑷𝒚 and explain it

Good Y is a complement good to good X since the coefficient of Py is negative.

IV. Interpret 𝑷𝒙

Px is the price of good X. The coefficient of Px is -1, meaning that when Py, Pz, and M are held constant, the quantity demanded of good X decreases by 1 unit when the price Px increases by 1 unit.